Taiwanese electronics companies head to New York for listings

SEC filings by Taiwan''s UMC and ASE earlier this week signal an onslaught of overseas equity offerings from the Island Republic this autumn.

Both companies are hoping to list on the New York Stock Exchange following the pioneering example of Taiwan Semiconductor Manufacturing Company's (TSMC) which became the first and only Taiwanese company to do so back in October 1997.

Of the two, IC foundry producer UMC (United Microelectronics Corp) will be particularly closely watched since the company is hoping to use its $1.2 billion equity offering as a springboard to broaden its investor base and further closer the gap between itself and rival TSMC. With Morgan Stanley as lead manager, pre-marketing of a 450 million new share deal is already under way following the company's SEC filing on Monday, with formal roadshows likely to start around September 11, although the exact date has not yet been fixed. 

Joint-lead is Credit Suisse First Boston, with ABN AMRO, Donaldson Lufkin & Jenrette (DLJ), ING Barings and Lehman Brothers as co-leads.

Should the company hit the $1.2 billion mark, it will just pip TSMC which launched Asia's (ex Japan) largest non-privatisation corporate equity offering at the beginning of June, raising $1.17 billion after the exercise of its greenshoe. However, where TSMC has been able to slightly outperform the Taiwan Weighted Index this year, rising 3.09% against the index's 9.846% fall, UMC has shed 11.61%, closing Thursday at NT$82.5.

And against the Philadelphia Semiconductor Index, which global funds use to benchmark performance, both companies have fared badly, with TSMC said to have underperformed the index by about 20% over the past six months and UMC by about 5% to 10%. The two companies' main Asian rival, Singapore-based Chartered Semiconductor, has by contrast, traded flat.

Analysts attribute the two companies' lacklustre performance to macro conditions in Taiwan rather than negative sentiment towards each on a stand-alone basis. Says Abraham Leu, semiconductor analyst at Prudential Bache Securities in Taipei, "It's because the economy is weak and there's not enough money in the system to push the big companies up. All the outperformers this year have been small cap."

improving global sentiment

On a global basis, however, sentiment towards semiconductor stocks has become more favourable as the sector moves out of a mid-cycle correction. As one analyst puts it, "The correction began in February as companies hit peak capacity and were unable to sustain momentum growth in the face of continuing strong demand. As a result capex started to go back up and investors, as is their want, decided to discount the peak of the cycle far too early. The correction probably ended about two weeks ago and I believe we are now well placed for a nice bull market. We are very overweight all foundry stocks."

One consequence of more favourable sentiment has been a recovery of the Philadelphia index which has clawed back roughly 15% of its 20% losses over the past two months. A second has been a growing divergence between Taiwan and New York, resulting in an expanded premium of TSMC's ADRs over the underlying stock.

Although the actual trading price of the company's ADRs at $35 has barely moved since its June offering, the premium hit a historical high of 90% last week, before retreating back to 58% as of yesterday (Thursday). Bankers attribute the fall to investors shorting the stock in anticipation of UMC moving ahead with its deal and expect the premium to come down further in the coming weeks. Given that UMC represents US investors' first opportunity to diversify away from the world's largest IC foundry producer, bankers also expect heavy switching activity.

UMC pricing indicators

Key to UMC's success will be the pricing premium it can achieve over its underlying shares. And although the underlying shares have fallen over the course of the year, prompting the company to push back its prospective ADR from June to September, TSMC's expanded premium should go some way to redressing the balance.

Most bankers agree that UMC should easily achieve a 20% premium, but believe the company may struggle if it hopes to breach the 30% mark. According to analysts, TSMC has averaged a 40% premium since its 1997 listing and managed to achieve a 43% premium in June. Prior to that, it achieved a 30% premium when it launched an $194 million ADR in November 1998.

Why TSMC should trade at premium at all when the stock is now freely available in Taiwan has always puzzled local analysts. That it does, is usually explained by the fact that since the ADR's have consistently outperformed the local stock, investors continue to buy them in a self-fulfilling prophecy.

Many analysts have begun to favour UMC over TSMC, with the former's strong financial performance and upside potential against the latter weighing heavily in favour of arguments that the domestic stock is undervalued. Says one local specialist, "It's pretty undervalued when you consider that it is only trading on a p/e ratio of 20 times 2000 earnings and 14 times 2001 earnings."

"The company's financials are amazing," he continues. "Sales growth continues to outstrip our forecasts on a month by month basis and the company has a very smart strategy in place. In June, for example, sales grew 273% year-on-year."

A second adds, "On a ratio of market capitalisation/annual wafer capacity, UMC is trading at a 12% discount to TSMC and on a p/e basis at a 20% discount. We think that in terms of the former, they should trade at the same level and of the latter that the p/e discount should narrow to about 8%."

In 2000, UMC projects that it will operate seven 8" Fabs, with total wafer capacity reaching 2.4 million against TSMC's projected 3.4 million. According to the US Semiconductor Industry Association (SIA), worldwide semiconductor sales rose to $16.6 billion in June, up 48.1% from last year's $11.2 billion figure. 

As more and more multinationals outsource silicon chip production, foundries' share of the semiconductor market is expected to double to 26% over the coming few years. New sources of chip demand from products such as mobile phones have also led many to believe that the sector will not fall prey to previous boom and bust cycles.

TSMC has always been the market leader sourcing demand for PC related products, whereas UMC has a much stronger track-record with communications-related products. It estimates that 40% of this year's sales volume should by communications-related, double 1998's figure.

Macronix to follow

Semiconductor designer and manufacturer Macronix is also hoping that positive momentum generated by UMC, in tandem with increasingly favourable sectoral sentiment will spur its second international equity deal of the year. A $600 million Nasdaq ADR led by Deutsche Bank and Merrill Lynch is said likely to file in mid-September. 

Analysts say that the company is well placed since it specialises in non-volatile memory chips, including rewriteable flash memory chips used in devises such as mobile phones and hand-held computers. According to the SIA, flash memory products registered 167% growth between June 1999 and June 2000, the highest increase of any category in the sector.

At the other end of the production chain, ASE (Advanced Semiconductor Engineering) also filed for a New York Stock Exchange listing at the beginning of the week. With Goldman Sachs as lead manager and Morgan Stanley Dean Witter as joint-lead, the company is hoping to raise $190 million from a 20 million ADS issue, where one receipt equals five common shares.

The world's second largest computer chip packager, ASE has seen its shares slide 32.49% over the course of the year, despite recording second quarter sales growth of 103% year-on-year. As one analyst concludes, "The big story this year is capacity shortage at the other end of the production chain. Packaging is a labour intensive activity which we do not particularly favour."

Other domestic companies whose overseas funding plans became known this week include Compal Computers which is believed to have mandated Goldman Sachs for a $300 million plus ADR and Premier Camera which is also looking to launch its first international equity offering since transferring from the OTC market to the main board at the end of last year.